Financing For 7-unit
I'm looking at purchasing a 7-unit apartment complex at around $250,000. I'm calling around local banks for financing and what I'm hearing are only ARM's are available for this type property. My own bank is offering 20 year amortization on 1-yr ARM @ 5.5%, 3-yr ARM @ 7.0% and 5-yr ARM @ 7.75% - all require 20% down.
My plan is to hold this long term, so I was hoping to lock into a longer rate. How do others finance these deals? Are ARMs typical? My deal will cashflow ok at 7.0%, but not so at 7.75%. I hate to lock in today and 3-years down the road be upside down.
I know there is a lenders tab, but I called and e-mail 3 different ones and have not heard back in 2 days. Anyone on this board have input?
A fixed rate fully amortizing mortgage on a 20 year amortization will start around 9% or slightly higher.
That's why bank and non-bank lenders typically offer balloons or ARMs, to get the rate down. The downside is that your financial situation may be different when the balloon is due, or when the ARM adjustments get a little expensive.
I just financed a 5 unit for an investor on a 30 year am, 3 year ARM at 8.75%, but it is fully amortizing. The borrower didn't want the closing costs again in a few years.
A 7 unit building is a commercial structure.
It sounds a little like this is new territory for you. Commercial loans shift more of the interest rate risk onto the borrower. There is no federally coordinated secondary market (Freddie Mac and Fannie Mae) so the rates tend to float more.
Try to structure the loan so that if it was to rise in later years that should be when the rents have also risen.
If you are sensitive to 7% vs. 7.75% then the project might not make as much sense as it first seemed. That is not a large move in the rates and we are only looking out 3 years for the 7% rate.
John
[addsig]
Thanks for the input. This is new territory for me.
I think the question I have then is for a property I would like to hold for 10, 15 or more years, what is the best way to analyze a deal like this in regard to interest rates?
As I mentioned, a pretty good deal at 7% slips to an okay deal at 7.75% and so if in 5 years the rate is 9.0% then its going to be a bad deal. In order to deal with commercial property do I then need to be good at predicting future interest rates, because if so maybe I am better off staying with 4-plexes and less as long-term holds? Or what type of tolerances do I need to build into my analysis for interest rate changes?[ Edited by TCDollars on Date 06/16/2004 ]
find a good broker to help you. there are small commercial lenders out there. If the cashflow is good, they will look at it.
There are other products with longer call periods. I know there is one with a 10 year call.
Also you might check with commercial forum and ask how they fincance their stuff.[ Edited by CharlieG123 on Date 06/16/2004 ]
Too bad the principal amount of this loan is so small. Otherwise you could look into a conduit loan or a FNME financing. Conduits are great for long term holds but they have nasty pre-pays so they have to be assumed.
Looks like you will have to take what you can get unless you can find a private lender.
Is the seller motivated enough to carry back a second for you to make the numbers work?